What do I need to know about VAT for my business?

Businesses are often overwhelmed by the idea of VAT because there are many complicated pieces of jargon used across industries. For those who are worrying, here is a back to basics guide to all things VAT by Clive Lewis, head of enterprise at ICAEW.

What is VAT?

VAT was an invention of the French in the 1950s and became a tax which all new members of the Common Market and European Union have had to sign up to when they join. You can only charge VAT on goods or services that you sell once your business has been registered for VAT. VAT is charged on:

Business sales ie. when you sell goods and services

Hiring or loaning goods to someone

Selling business assets

Commission

Items sold to staff eg. canteen meals

Business goods used for personal reasons

‘Non-sales’ like bartering, part-exchange and gifts

If you’re a VAT-registered business, you must report to HM Revenue and Customs (HMRC) the amount of VAT you’ve charged and the amount of VAT you’ve paid.

Compulsory VAT registration threshold

You must register for VAT if your turnover exceeds £83,000 in the previous 12 months (for 2016-17 tax year). You can voluntarily register at any time (if turnover is below compulsory registration threshold).

How does VAT work?

VAT is added to sales invoices and purchase invoices will have VAT added if a supplier is VAT registered. VAT invoices must have all the required information on them eg. VAT registration number. Most items incur VAT at the standard rate (currently 20%), but some items are chargeable at the reduced rate of 5% or are zero-rated (0%).

VAT-free

There are items that are zero-rated for VAT or are exempt from the tax. It is worth being aware that the exact definition of a particular item can affect whether VAT is applied to it. There are a number of irregularities in the VAT system, some of which have resulted in fierce debates between businesses and HMRC.

One famous example is the Jaffa Cakes case, which went all the way to a tribunal to determine whether they were classed as cakes or luxury biscuits. While cakes are exempt from tax, luxury biscuits are subject to VAT at the standard rate. McVities, the makers of Jaffa Cakes, insisted they were small cakes and eventually the tribunal ruled in favour of this.

VAT returns

The basic system is that, every three months, a VAT return is submitted on-line to HMRC. Output tax (on sales) and Input tax (on purchases) are netted and the difference – usually with outputs exceeding inputs – is paid over to HMRC. Where inputs exceed outputs, a repayment will be made by HMRC. Payments can be made in a variety of specified ways.

Various other schemes

Cash Accounting (or receipts and payments system) if business VAT taxable sales of less than £1.6m:

Use receipts from customers and payments to suppliers rather than invoices

Selling overseas

Businesses selling digital services to consumers in the EU can either register for VAT in the EU state of its customer or complete a UK VAT MOSS scheme return each quarter and make just one payment to HMRC who pass on the relevant share of VAT to the VAT authority in each member state.

The change to sales of digital services arose because of changes to “place of supply” rules from being determined by the member state VAT rates of the supplier to those of the customer. The change came into effect on 1 January 2015.

Many UK businesses avoid the paperwork by selling through a platform such as Amazon.

Hi. I'm in the process of setting-up a new business and wondering if I should register for vat now before i start or wait until I reach the turnover threshold. Thanks in advance for your input.
Regards
Martin